The US dollar to Canadian dollar (USD/CAD) exchange rate was trading near 1.3875 on Tuesday, little changed on the day as the pair consolidates after retreating from late-December highs.
The currency pair has spent the past week moving sideways, reflecting a pause in the US dollar’s recovery and tentative signs of renewed support for the Canadian dollar.
According to Scotiabank, the balance of risks has begun to tilt modestly in favour of the CAD after a period of underperformance.
The bank highlights the recovery in oil prices as an important tailwind, helping to stabilise Canada’s terms of trade and underpin demand for the currency.
At the same time, interest-rate differentials have started to turn lower, reversing some of the recent widening that had weighed on the CAD earlier in the month.
Scotiabank’s fair-value estimate for USD/CAD has rolled over toward 1.382, broadly in line with firmer oil prices and narrowing spreads.
Near-term domestic risk is seen as limited, with upcoming housing and manufacturing data unlikely to derail the current consolidation and no Bank of Canada communication scheduled ahead of the late-January policy decision.
From a technical perspective, the bank argues that USD/CAD’s rally has stalled, with the pair struggling to sustain gains above the 1.39 area.
Scotiabank sees scope for near-term weakness toward the low-1.38s, while expecting the pair to remain range-bound between roughly 1.382 and 1.392 in the short run.
Seasonal patterns, which often turn more favourable for the Canadian dollar toward the end of January, add to the case for a cautious, mildly CAD-positive outlook rather than a renewed USD breakout.
